UNITED STATES—Retirement is meant to be your golden years. You worked hard for many decades and now get to enjoy the fruits of your labor. However, retirement may also bring new financial challenges. Seniors can learn how to address and overcome these and avoid pitfalls to enjoy a stress-free retirement. This article will cover five financial mistakes you should avoid making in retirement.
1. Not having life insurance
Life insurance for seniors can help you protect your partner or other loved ones. If you pass away during the policy term, it pays them a substantial death benefit to replace your income and pay off debts.
Life insurance is also a great estate planning tool because the death benefit is tax-free. This allows your heirs to receive more of your wealth by avoiding taxes on the death benefit.
You can consider getting a life insurance policy with affordable premiums, such as term life or final expense insurance. You can also get a life insurance retirement plan (LIRP) that can provide financial security in addition to your other retirement plans . These permanent life policies build cash value over time so that you can have extra money to fund your retirement.
2. Collecting Social Security too early
You can begin to receive Social Security at 62, but you don’t have to. You can also defer it to age 70. The longer you defer your Social Security, the larger your recurring payout becomes. So, deferring might be a good idea if you have enough assets or income streams elsewhere to cover your expenses.
If you need Social Security, consider working a few extra years instead. Your Social Security benefit is calculated based on your highest 35 earning years. Your top earnings years tend to be later in life, so this could bolster your benefit even more. As a result, you can get a larger payout from deferment and from working at a higher salary for longer.
3. Underestimating medical expenses
Seniors qualify for Medicare at 65. However, Medicare may not cover all medical expenses. Additionally, it doesn’t cover the following:
- Copayments
- Deductibles
- Dental, vision, and hearing condition care costs
- Long-term nursing-home care
Purchasing an extra policy may be worth it. A high-deductible health plan, in particular, might be a good option if you’re aiming to save the most money. Premiums are lower, but they also come with Health Savings Accounts that offer triple-tax advantages:
- Contributions are tax-deductible
- Earnings are tax-deferred
- Withdrawals are tax-free for qualifying medical expenses
You can also withdraw from this account for any reason without penalty once you’re 65. However, you may owe income taxes on earnings after withdrawing.
According to LIMRA, long-term care planning can reduce stress for seniors and their families. Your life insurance can play a part in the long-term care side of things if you purchase a long-term care rider. This lets you tap into your death benefit while alive if you have a qualifying injury or illness.
4. Paying too much in taxes
After retiring, you may no longer be earning income from a job. You instead must rely on the wealth you have built up. As a result, you’ll need to pay close attention to your tax burden and create a distribution strategy that minimizes taxes.
For example, required minimum distributions (RMDs) from tax-deferred retirement accounts like traditional IRAs can push up your taxable income. So, some retirees may start taking distributions from these accounts before the age they’re required. This helps spread the tax burden across multiple years. Then, when the RMDs start, they may tap into Roth IRAs and other tax-free or tax-advantaged sources to cover the gaps while keeping their taxes lower. Again, consult your financial advisor about your unique situation.
5. Failing to update your estate plan
Estate planning is crucial to ensure your end-of-life wishes are met. Your estate plan dictates how your assets are distributed, explains what medical and financial decisions you want to be made if you become incapacitated or pass away, and more.
Here are some key documents to include in your estate plan:
- Will: Your will explains how you want assets to be distributed.
- Durable power of attorney: This designates someone to handle financial decisions on your behalf if you become incapacitated. For example, they could pay your bills and access your bank accounts.
- Medical power of attorney: This designates someone to make medical decisions on your behalf if you become incapacitated.
- Advanced health care directives: These explain your end-of-life medical care wishes.
Don’t make these financial mistakes in retirement
Every stage of life poses new challenges, and retirement is no exception. It’s important to know common retirement mistakes and how to avoid them. Start by getting a life insurance policy to ensure your loved ones are protected and maximize your estate to help your heirs. This will help with long-term matters.
In the short term, determine if you need Social Security right away, and if not, defer as long as possible to maximize your benefit. Meanwhile, don’t underestimate medical expenses — consider purchasing more health coverage if possible . You must also avoid paying too much in taxes by creating an efficient asset distribution strategy that cuts your tax bill without impacting your lifestyle.
Finally, get your estate plan in order so that your end-of-life wishes for your assets and medical care are met. These steps will take some work, but the peace of mind is well worth it and can let you enjoy your retirement far more.
